5 Things to Expect When You Open a Brokerage Account

Know what you'll need when you're ready to start investing through a brokerage.

Apr 27, 2014 at 9:00AM

If you're reading this, you may be planning to open a brokerage account to start investing. Here are five things to expect if you do.

1. Be prepared to verify your identity. This will likely include your Social Security or other tax identification number. Or it could be a driver's license or passport information, or some form of other government-issued identification. The Securities and Exchange Commission and Financial Industry Regulatory Authority require brokerage firms to ask for this information. And firms use the information for tax-reporting purposes and to comply with the USA PATRIOT Act.

2. You'll be asked about your financial situation. This may include your employment status and financial information, such as your annual income and net worth. Also expect questions about your investment objectives and the amount of risk you're willing to take on. If your broker is recommending investments to you, SEC and FINRA rules require that your broker collect this information. In addition, the information can help your broker recommend suitable investments.

3. Decide whether you want a cash account or margin loan account. Most brokerage firms offer at least two types of accounts -- a cash account and a margin loan account (often called a "margin account"). In a cash account, you must pay for your securities in full at the time of purchase. In a margin loan account, although you must eventually pay for your securities in full, your broker can lend you funds at the time of purchase, with the securities in your portfolio serving as collateral for the loan. This is called buying securities "on margin." The shortfall between the purchase price and the amount of money you put in is a loan from the brokerage firm, and you will incur interest costs, just as with any other loan. Some firms automatically place you in a margin account unless you make it clear you want a cash account.

4. Determine how you want to manage your uninvested cash. Sometimes there is cash in your account that hasn't been invested. For example, you may have just deposited money into your account without giving instructions on how to invest it, or you may have received cash dividends or interest. Your brokerage firm typically will automatically place -- or "sweep" -- that cash into a cash management program (customarily known as a "cash sweep" program). On your new account application, your brokerage firm may ask you to select a cash management program. These programs offer different benefits and risks, including different interest rates and insurance coverage. Be sure you understand the different features of the cash management programs that your firm offers, so that you can make an informed decision if you are asked to choose one.

5. Decide who will make the final decisions for your account. You will have final say on investment decisions in your account unless you give "discretionary authority" in writing to another person, such as your financial professional. With discretionary authority, this person may invest your money without consulting you about the price, amount or type of security, or timing of the trades that are placed for your account. Some firms allow you to indicate who has discretionary authority over the account on the new account application. Others require separate documentation.

If you haven't already done so, make sure you check out the background of your broker and brokerage firm before you open an account with them. Look up your broker and firm on FINRA Brokercheck or call toll-free (800) 289-9999.

For more information about saving and investing visit the investors section of FINRA.org.

FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.

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